We reiterate our UNDERWEIGHT rating on the sector. Against our expectation, there was no sequential improvement in the glove makers’ 4QCY22 results as earnings tumbled further into a sea of red. The results suggest recurring losses in subsequent quarters with declining ASPs (albeit at a slower rate), exacerbated by elevated costs and low plant utilization amidst intense competition. We beg to differ from the Malaysian Rubber Glove Manufacturers Association (MARGMA) which expects the industry to turn the corner this year. Based on our demand-supply forecasts, it will take at least another two years of consistent demand growth to fully fill the current excess industry capacity. We believe that the pivot is more likely to happen in 2024, and do not have any top pick for the sector.

A sea of red in 4QCY22. Glove players dipped into losses in the recently concluded 4QCY22 results season. All players came in below both our and consensus forecasts, versus 25% within and 75% below ours, and all below consensus in the previous 3QCY22 results season. Generally, all players were hit by: (i) excess capacity leading to reluctance of customers to commit sizeable orders and hold substantial stocks on expectations of further price decline, (ii) margin erosion as costs remains elevated including energy and labour costs against falling average selling price (ASP) (ASP/1,000 pieces is USD20 vs cost/1,000 pieces of USD21-23), and (iii) reduced economies of scale arising from volume that is less than optimum, particularly, due to poor cost absorption.

The recent round of results reported by glove makers suggest that players are likely to continue to incur losses in subsequent quarters with ASP expected to continue to decline (albeit at a slower rate), exacerbated by elevated costs and low plant utilization averaging 40%-50% amidst intense competition. As gathered from our channel checks, some players are hopeful that the rate of decline in ASP is slowing, whilst others believe selling prices have bottomed. Hopeful that selling prices have bottomed out, certain players will attempt to raise prices starting from Mar 2023 by an average of 5% from ASP USD19-21 to USD20-22. We are uncertain if this is viable as we gathered from sources that Chinese players are still undercutting by selling as low as USD14-16 per 1,000 pieces. Furthermore, the prospect of raising ASP is challenging due to the current massive overcapacity situation. In view of the increasingly challenging business landscape, glove players are prioritising production at their newer and more efficient factories while temporarily leaving the older ones idle.

Oversupply to persist. We expect the operating environment to continue to remain challenging in subsequent quarters being plagued by massive oversupply, reluctance of customers to commit to sizeable orders and hold substantial stocks. MARGMA projects 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. Still, capacity is seen to expand further in 2023. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. However, this will do little to ease the overcapacity situation as the global glove production capacity will grow another 16% to 595b pieces during the year, as more capacity planned by incumbent and new players during the pandemic years - enticed by super-fat margins that had evaporated - finally come on-line. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The expanded overcapacity means low prices and depressed plant utilisation will likely persist in 2023. Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices.

Our 2023 forecasts assume: (i) an ASP per 1,000 pieces of USD20, translating to an estimated 10% decline over 2022, and (ii) an average plant utilisation of 50% vs. an estimated 60% in 2022. During the 2014/2015 downturn, ASP of nitrile gloves went as low as USD17/USD18 per 1,000 pieces while industry utilisation was at around 65%-70%.

We advocate investors to avoid the sector for now, and not have any top pick for the sector.

Source: Kenanga Research - 8 Mar 2023